July 29 (Bloomberg) -- It’s been a year since the U.S.
Senate held a hearing on logjams at metal storage facilities and
rising fees. Since then, costs have gone up and waiting times
for delivery at some sites are even longer.

The London Metal Exchange, which oversees more than 700
warehouses, has been blocked from easing delays by Moscow-based
United Co. Rusal, which as the world’s biggest aluminum producer
stands to lose from shorter backlogs. The LME issued a new rule
that storage facilities with the longest wait times had to
release more metal than they took in. Rusal blocked the measure
in a U.K. court, and the exchange is appealing in a case that
started in London today.

Wait times to obtain aluminum stretch to almost two years
or longer in Detroit and Vlissingen, Netherlands, the two
biggest sites for the LME-tracked metal. That’s up from about 15
months a year ago, when U.S. Senator Sherrod Brown, an Ohio
Democrat, called on U.S. regulators to force changes in metals
warehousing. Instead, higher prices benefited producers
including Rusal and New York-based Alcoa Inc. and hurt end-users
such as beverage makers.

Rusal “as a producer, is advantaged by the status quo,”
said Michael Beloff, a lawyer for the LME, at the start of the
appeal hearing. The company is “heavily reliant” on the
continuing high level of fees added to benchmark prices, he
said.

Aluminum Supply

The issue came to Senator Brown’s attention after companies
such as Denver-based brewer MillerCoors LLC complained that LME-authorized warehouse operators including Metro International
Trade Services LLC, a unit of Goldman Sachs Group Inc., and
Glencore Plc-owned Pacorini Metals were creating artificial
limits on aluminum supply. U.S. regulators subpoenaed documents
from warehousers including Metro last year. At least 36 lawsuits
have been filed against the LME, Goldman Sachs and metal
suppliers.

The price of aluminum for delivery in three months on the
LME gained 11 percent in the past year to $1,988 a metric ton.
Surcharges to obtain the metal in the U.S. and Europe, known as
premiums, increased as much as 73 percent.

The backlog for aluminum at depots in Detroit operated by
Metro increased to 681 days as of the end of June from 675 at
the end of May, according to the LME data. The period at
warehouses owned by Pacorini in Vlissingen lengthened to 774
days from 716 in May. Owners of the metal pay storage fees
during that time.

The LME’s new “load-in, load-out” rule, slated to have
begun in April, would have “little material effect on warehouse
queues,” Rusal said yesterday in a statement. The bourse should
have explained why it rejected the option of capping rents at
backlog-affected warehouses and a consultation on the proposed
rules was “clearly unfair,” the company said in its court
documents.

Metal Queues

“For the LME to address the problem of aluminum queues, it
needs to implement its proposed new delivery-out rules,” said
Nic Brown, head of commodity research at Natixis SA in London.
“That’s not to say that the new rules would suddenly cure the
problem. But you have to start somewhere.”

Global aluminum costs are $6 billion higher because of the
long waits, according to Novelis Inc., a manufacturer of rolled
aluminum whose customers include Coca-Cola Co. and Dearborn,
Michigan-based Ford Motor Co. That’s twice the amount
MillerCoors estimated last year.

Just this year, the jump in premiums alone has cost North
American consumers an additional $650 million, according to the
Beer Institute, a Washington-based industry group.

“Clearly there hasn’t been a very visible regulatory
response,” said Nick Madden, chief procurement officer at
Atlanta-based Novelis. “This process clearly will take a long
time.”

Hub Cities

Lengthy waits for copper, lead and zinc have mostly
disappeared in hub cities such as New Orleans; Antwerp, Belgium,
and Johor, Malaysia, as inventories have fallen. Even as the
court thwarted the LME’s plan to change the warehouse rules, the
exchange said it is still watching warehouse metal flows to
determine delivery requirements for the eventual introduction of
the rule.

The surcharge for obtaining a specific parcel of aluminum
in a specific location, which is added to the LME benchmark
price, is at 19.75 cents a pound in the U.S. Midwest, compared
with 12 cents a year ago, according to Metal Bulletin data. The
fee reached a record 20.9 cents in January. The premium in
Europe, without import fees, rose to a record $402.50 a ton from
$250.

Goldman Sachs has said its Metro unit is up for sale. The
bank said last month it started complying with the load-in,
load-out rule even after the court blocked the measure.

Higher Costs

Warehouse waits are not the only reason costs are higher.
Aluminum producers have curbed output and demand is stronger,
helped by carmakers who are switching to the metal as a lighter
alternative to steel.

Alcoa, the largest U.S. producer, said it will include new
language in its quarterly filings with the U.S. Securities and
Exchange Commission explaining risks from a potential “flood”
of stockpiled aluminum arriving on the market.

The company this month reported better-than-expected
second-quarter profit. Shares have gained 112 percent in the
last year. Rusal narrowed its net loss in the first quarter on
rising premiums and reduced costs. The shares are up 52 percent
in the last year.

The LME’s original plan, to require depots that have delays
of more than 50 days to deliver more metal than they take in,
was derailed March 27 when Rusal won a legal challenge. Judge
Stephen Phillips said the LME’s consultation process leading to
the new rule was “unfair and unlawful.”

Competition Law

Judge Rupert Jackson, who granted the LME the right to
appeal in May, argued that Phillips’s ruling, “if correct,
places onerous obligations on any public body conducting a
consultation on complex issues in a politically sensitive
area,” according to a copy of the order, supplied by the LME.
The bourse ruled out capping rents because of concerns it might
breach competition law.

There won’t be an immediate impact should the court rule in
favor of the LME, according to Natixis. The exchange would have
to give warehouse operators some form of grace period before
introducing changes, according to Macquarie Group Ltd.

“As they do make changes there are so many opinions, no
matter what move they make, if it’s helpful to someone, it’s
probably going to be unhelpful to someone else and so they face
litigation,” said Madden at Novelis.